Analyst and Investor Day€¦ · 1) Adjusted EBITDA excludes share-based compensation expense, equity method investment loss, earn-out and warrant fair value adjustments, transaction

Analyst and Investor Day September 11, 2014

Welcome and Opening Remarks Robert Musslewhite Chairman and Chief Executive Officer

©2014 The Advisory Board Company • advisory.com

6

2

3

1

Road Map

Overview of Our Business

Compelling Growth Opportunities

Performance Snapshot


7

The Advisory Board in Brief

The leading health care and

higher education software

and analytics provider, driving

transformation and ROI for our

members and in our markets.

Identify key

challenges

IDENTIFY DISTILL TRANSLATE HARDWIRE POWER

Distill best

practices

Translate to

unique products

Hardwire solutions

to drive change

Power high

value and ROI


8

Incredible Breadth of Relationships

8,000+ CEO/COO

relationships

Established Health Care Member Base Growing Presence in Higher Ed

600+ members

88% of U.S. News &

World Report top

100 universities

1,300+ President/Provost

relationships

3,900+ global members

100% U.S. News & World

Report honor roll

hospitals


9

Uniquely Deep Knowledge of Right Answer

300+ industry experts

2,600+ collective years of health care experience

POWERFUL

research engine

PROFOUND

institutional expertise

World-Class Insight and Intellectual Property Differentiate Our Solutions

Unique Ability to Discern Best Practice


10

The Leading Vertical SaaS Platform in Health Care

Integrated Analytics Platform Driven by Best Practice Insight

Powerful, Flexible Software Platform

Member Provided Data 3rd Party Data Proprietary Data

Crimson

Population Risk

Management

Crimson

Surgery

Compass

Cost & Ops

Revenue

Cycle

Compass

Rev Cycle

Multiple Differentiated Applications


11

The Leading Vertical SaaS Platform in Health Care

Integrated Analytics Platform Driven by Best Practice Insight

Powerful, Flexible Software Platform

Member Provided Data 3rd Party Data Proprietary Data

60% of hospital admissions

flowing through our platform

members

2,000+ memberships

3,700+ user sessions annually

1.6M+


12

Platform Enables Comprehensive Offerings

Margin Maximization

Reducing avoidable costs and

increasing revenue capture

Value-Based Growth

Fueling sustained growth

through provider-, consumer-,

and payer-focused strategies

Population Health

Management

Transforming care delivery

and payment to assume

risk for defined populations

PROBLEM AREAS


13

Margin Maximization Offerings

PROBLEM AREAS

• Financial Management

Program

• Revenue Cycle

Performance Programs

$1.5B+

Spend sourced through our

supplier-neutral platform

$205M+

ROI across our physician

cost platform since 2012

15:1

ROI on cost strategic

assessments last year

$2.9B+

Revenue enhancement

over 10+ years of service

REPRESENTATIVE ASSETS

• Surgery Performance

Program

• Crimson Continuum of Care

• Crimson Practice

Management

• Strategic Sourcing Program

OUR EXPERIENCE IN NUMBERS

Margin Maximization



Value-Based Growth

Fueling sustained growth through

provider-, consumer-, and payer-

focused strategies

Population Health Management

Transforming care delivery and

payment to assume risk for

defined populations


14

Value-Based Growth Offerings

PROBLEM AREAS

• Market Planning Research

• Service Line Strategic

Assessments


• Crimson Continuum of Care

• Crimson Market Advantage

• Patient Experience Program

• Crimson Medical Referrals


20+

Years of growth,

marketing and planning

research experience

1,000+

Custom growth and

planning projects

completed per year

1.2B+

Practitioner-level claims

enabling full market

visibility

$700M+

New net revenue realized

from 2012 targeted

outreach

Margin Maximization



Value-Based Growth



focused strategies




defined populations


15

Population Health Management Offerings

PROBLEM AREAS

• Population Health

Advisor Program

• Medical Group Strategy


• Payer Integrity Forecaster

• Crimson Population

Risk Management

• Crimson Care Management

• Clinical Integration Initiative


350+

Accountable care projects

across 45 states

1,500+

Hospitals using our value-

based care technology

550K+

Physician profiles on cost

and quality performance

10M+

At-risk lives managed

using our technology

Margin Maximization



Value-Based Growth



focused strategies




defined populations


16

Building Similarly in Higher Education

Growth of a Student-Centric Platform


Enrollment Growth Attracting the best-fit students

to the university

Next-Generation Learning Creating a personalizing learning

experience for students

Student Retention Ensuring on-time graduation

for all students

Student Employment Ensuring gainful employment

for all students

5,000+

Senior leader

relationships at members

500+

Research studies

published every year

120M +

Student course

records analyzed

1.5M +

Active students supported

on technology platforms

PROBLEM AREAS


17

Delivering Measurable Results

MARGIN

MAXIMIZATION

Houston Methodist

Reduced potential for

denied payments

$7.2M

Carson Tahoe Health

Savings through

improved practice

performance

$4M

VALUE-BASED

GROWTH

Three-hospital

system

Increased investment in

physician relationship

development

$5.1M

480-bed hospital

Growing Cardiovascular

and EP volumes

$3.7M

$490K Southern Illinois Univ.

Additional tuition revenue

through targeted campaigns

$2.2M Georgia State University

Projected increased revenue

from student retention gains

$5.6M

Adena

Net savings from reduction

in clinical variation

$3.5M

Covenant

Health System

Increased use of

generics and lowered

avoidable utilization

POPULATION HEALTH

MANAGEMENT

HIGHER

EDUCATION


18

2

3

1

Road Map





19

Robust Markets Served

1) World Bank Organization; Health care expenditures

in total, Public expenditures on education.

Percentage of

2010 US GDP1 18% 5%

Number of Potential

Purchase Points 15,000+ 5,000+

Degree of Change

and Complexity Very High High

Adoption of

Best-in-Class Analytics Low Low


20

Continued Huge Cross-Sell Potential

New Customers

New Programs

$5B Cross Sell

Current

Opportunity

~15,000

Immediate Prospects

• US hospitals

• Other US health care

• International hospitals

• US education

• International education

~4,100

Current members

New Program

Launches

• New research

programs

• New software-

based programs

• New management/

advisory services

programs

• New data programs

50+

Current programs


21

Cross Selling to Grow Relationships

Memorial Hermann Relationship History

Patient Experience Program 2014

Crimson Care Management 2013

Crimson Population Risk Management and Crimson Care Registry 2012

Crimson Market Advantage and Payer Integrity Performance Program 2010

Crimson 2008

Nursing Compass 2007

Cost & Ops and Workforce Consulting 2003

1992

Partnership originates through research membership;

Establish deep executive relationships


22

Member-Driven Product Development

Leveraging Our

Research Engine

New products

launched yearly

30-40 25 4-5

New Product Launches

Strategic Acquisitions

9,000+

C-suite relationships

Visibility Into member strategy

and operating plans

Increasing

To member

performance data

Access

Conversations weekly

2,000+

New programs

under evaluation

Industry leaders as

charter members

Expand capabilities Augment tech platform

Enhance speed to market


23

Demonstrated Ability to Scale Acquired Businesses over Time

Proven Track Record of Success

CrimsonMay 2008

SouthwindDec 2009

ConcuityMar 2010

Other 2011-2014

Total Blank CV fromAcquiredProducts

CV fromProducts Builton Acquired

Platforms

Total

Total Acquired Run Rate Revenue

Millions

~$165

~$88 ~$253

~$47


24

Core Crimson Program Growth

Revenue Contribution

2008 2013

$2M

($1M)

$60M+

$33M+


25

2

3

1

Road Map





26

Snapshot of a High-Growth Company: 2010-2014

Consistent Focus on Growth Investment

‘ ‘ The Company’s initiatives in health care and education

are progressive and have potential to not only guide

institutions through changing paradigms, but to help

design those paradigms. THAT is exciting!”

John Sampson Rutland Regional Medical Center

New Program

Launches

18 New

Members

1,618 New

Memberships

10,700+

New Logo and

Brand Identity


27

Predictability of Renewals Yields Strong Visibility

FY09 FY10 FY11 FY12 FY13

88% 89% 91% 92% 90%

Member Renewal Rate Composition of Annual Revenues

Deferred

Revenues

Renewals

New

Contracts

Annual

Revenues

85%+

of revenues visible at

beginning of calendar year

FY14

90%


28

Results Demonstrate Consistent Growth

Revenue Adjusted EBITDA1

CY12 CY11 CY13

$345.5

$431.6

$502.3

$62.7

$81.4

$89.3

20.6% 19.3% 2011-2013

CAGR

(Millions) (Millions)

$570-$580

CY14(P)

$97-103

CY12 CY11 CY13 CY14(P)2

1) Adjusted EBITDA excludes share-based compensation expense, equity method investment loss,

earn-out and warrant fair value adjustments, transaction related costs, and discontinued operations.

2) CY 2014 Adjusted EBITDA includes dilution from Healthpost, Care Team Connect, and MRS acquisitions.


29

Long Term Share Price Performance

0%

200%

400%

600%

800%

S& P 500 ABCO


30

Managing with an Eye to Long Term Value

Drive greater

member value

Expand footprint

with members

Grow long term

revenue and earnings

Invest in

new products


31

Today’s Agenda

Welcome and Overview Robert Musslewhite

Health Care Market Update Chas Roades

Higher Ed Market Update Scott Fassbach

Member Case Study Jim Cote, Senior Vice President and Clinical

Administrator, Virginia Mason Medical Center

Product Demonstrations Taylor Rohrberger, Matt Cinque,

Jim Lazarus, Zac Stillerman, and Ed Venit

Closing Remarks Robert Musslewhite

1

• Current challenges in health

care and higher education

• Demonstrating member value

• Product demonstrations

Our Focus for Today

What You Won’t See

• Heavy operational details

• Detailed financial review

• The same “faces”

3

4

5

6

2

Update on the Health Care

Marketplace Highlights from Recent Advisory Board Research

©2014 The Advisory Board Company • advisory.com • 28601A

6

Staying Afloat Through Cross-Subsidization

Source: American Hospital Association, “Trendwatch Chartbook

2014,” available at: www.aha.org; Health Care Advisory Board

interviews and analysis.

The Existing Business Model

Hospital Payment-to-Cost

Ratio, Private Payer, 2012

149% Hospital Payment-to-Cost

Ratio, Medicare, 2012

86%

• Above-cost pricing

• Robust fee-for-service

volume growth

• Steady price growth

• Only one component of

our total business

Commercial Insurance Public Payers

Below Cost Above Cost

Traditional Hospital Cross-Subsidy

http://www.aha.org/


7

Traditional Strategy Dependent Upon Price, Network Assumptions

Source: Health Care Advisory Board interviews and analysis.

Shadow Pricing at Every Level

Established Provider

• Expect steady public-

payer, commercial

price growth

• In-network for most

plans

Entrenched Payer

• Maintain broad

provider networks

• Pass excess cost

growth on to

employers through

brokers

Price-Insulated Patient

• Open access to broad

provider network

• Seek care with little

concern for out-of-

pocket payment

Traditional Assumptions Underlying Provider Growth Strategy


8

Three Trends Threatening the Traditional Provider Business Model


Cross-Subsidy Economics Under Stress

Medicare Payment

Innovation

• New risk-based

payment models

• Growth of Medicare

Advantage

Market-Based

Medicaid Reform

• Growth of Medicaid

Managed Care

• Commercialization

through “Private Option”

Increased Commercial

Market Competition

• New dynamic

individual market

• New channels for

competition in group

market

1 2 3


9

Becoming a Bigger Part of Our Core Business

Trend #1: Medicare Payment Innovation

Source: CMS, “2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance

and Federal Supplementary Medical Insurance Trust Funds,” May 31, 2013, available at:

http://downloads.cms.gov/files/TR2013.pdf; Health Care Advisory Board interviews and analysis.

Growing Wave of Medicare Beneficiaries

Average Inpatient Case Mix

By Volume

n = 785 Hospitals

Projected Number of

Medicare Beneficiaries

Millions of Beneficiaries

54.0M

55.6M

57.3M

59.0M

60.7M

62.5M

64.3M

2014 2015 2016 2017 2018 2019 2020

42%

19%

33%

6%

58% 15%

25%

2%

2012 2022

Medicare

Medicaid

Commercial

Self-Pay

Medicare

Medicaid

Commercial

Self-Pay

http://downloads.cms.gov/files/TR2013.pdf




10

Medicare Payment Cuts Becoming the Norm

Source: CBO, “Letter to the Honorable John Boehner Providing an Estimate for H.R.6079, The Repeal of Obamacare Act,” July 24, 2012;

CBO, “Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act,” September 12, 2011; CBO,

“Bipartisan Budget Act of 2013,” December 11, 2013, all available at: www.cbo.gov; Health Care Advisory Board interviews and analysis.

1) Includes hospital, skilled nursing facility, hospice, and

home health services; excludes physician services.

2) Disproportionate Share Hospital.

Public-Payer Reimbursement Already a Prime Target

($4B)

($14B) ($21B)

($25B) ($32B)

($42B)

($53B)

($64B)

($75B)

($86B)

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

ACA’s Medicare Fee-for-Service Payment Cuts

Reductions to Annual Payment Rate Increases1

$415B in total

fee-for-service

cuts, 2013-2022

$260B Hospital payment

rate cuts,

2013-2022

$56B Reduced Medicare

and Medicaid DSH2

payments, 2013-2022

$151B Reduced Medicare payments

due to sequestration and

2013 budget bill

http://www.cob.gov/


11

More Mandatory, Optional Risk Programs On the Horizon

Source: The Advisory Board Company, “Mortality Rates Are Only One of Many VBP Changes

to Come,” December 4, 2013, available at: www.advisory.com; CMS, “Request for Information

on Specialty Practitioner Payment Model Opportunities,” February 2014, available at:

www.innovation.coms.gov; Health Care Advisory Board interviews and analysis.

1) Value-Based Purchasing.

2) Includes Value-Based Purchasing Program, Hospital Readmissions

Reduction Program, and Hospital-Acquired Conditions Program.

3) Request for information.

Steady Shift Toward Risk-Based Payment

20% 25% 25%

30%

40%

30%

30%

30%

25%

70%

45%

20% 10%

FY 2013 FY 2014 FY 2015 FY 2016

Clinical Process

Patient Experience

Outcomes of Care

Efficiency

Medicare VBP1 Program Domain Weights

Medicare revenue at risk from mandatory

pay-for-performance programs2, FY 2017

6%

Two New Bundled Payment

Initiatives in CMS RFI3

Bundled Payment for

Outpatient Specialty

Procedures

May include radiology,

diagnostics, drugs, and

facility payments

Bundled Payment for

Complex, Chronic

Disease Management

Would incentivize

specialists to manage a

beneficiary's care over a

long-term period

http://www.advisory.com/

http://www.innovation.coms.gov/


12

ACO Presence Steadily Extending Nationwide

Source: CMS, “More Partnerships Between Doctors and Hospitals Strengthen Coordinated Care for

Medicare Beneficiaries,” December 23, 2013; Muhlestein D, “Accountable Care Growth In 2014: A Look

Ahead,” Health Affairs Blog, January 29, 2014; Oliver Wyman, “Accountable Care Organizations Now

Serve 14% of Americans,” February 19, 2013; Health Care Advisory Board interviews and analysis.

1) Medicare Shared Savings Program.

ACOs Reaching a Tipping Point

Total Number of Operating ACOs

January 2014

Widening Reach of ACOs

52% Portion of US

population living in a

primary care service

area with an ACO

14% Portion of US

population treated

by an ACO

5.3M Medicare FFS

beneficiaries treated

by an ACO

23

606

114

106

123

240

2012

MSSP1

Cohorts

2013

MSSP

Cohort

Private

Sector

ACOs

Pioneer

ACO

Model

Total 2014

MSSP

Cohort


13

Physician-Led ACOs More Likely to Generate Savings

Source: Muhlestein D, “Accountable Care Growth in 2014: A Look Ahead,” Health Affairs Blog, January 29, 2014,

available at: www.healthaffairs.com/blog; CMS, “More Partnerships Between Doctors and Hospitals Strengthen

Coordinated Care for Medicare Beneficiaries,” December 23, 2013; Oliver Wyman, “Accountable Care Organizations

Now Serve 14% of Americans,” February 19, 2013; Health Care Advisory Board interviews and analysis.

1) Medicare Shared Savings Program.

Starting To See Early Adopters Move the Dial

First-Year Spending Reduction

By MSSP1 ACOs

2012 Cohort

$147M Total cost savings by

Pioneer ACOs in first year

$126M Shared savings earned by 2012

MSSP ACOs in first year

Percent of MSSP ACOs that Earned

Shared Savings by Sponsorship

29%

20%

Physician-Led Hospital-Led

25%

22%

53%

Earned

Shared

Savings

Reduced

Spending But

Did Not Earn

Shared Savings

Did Not Reduce

Spending

2012 Cohort

http://www.healthaffairs.com/blog


14

Precipitating an Individualization of the Medicare Market

Source: Jacobson G et al., “Projecting Medicare Advantage Enrollment: Expect the Unexpected?”

Kaiser Family Foundation, June 12, 2013, available at: www.kff.org; Hollander C, “CMS to

Increase Medicare Advantage Pay Rate By 0.4%,” ModernHealthcare, April 7, 2014, available at:

www.modernhealthcare.com; Health Care Advisory Board interviews and analysis.

1) Medicare Advantage.

Medicare Advantage Growth Unlikely to Abate

Initial proposed 2015

MA1 payment rate cut

(1.9%)

Final announced 2015

MA payment rate increase

0.4%

2013 Projections 2010 Projections

Projected Number of Medicare Advantage Enrollees

Millions of Enrollees

29.5% of Medicare

beneficiaries

10.4M

19.0M

8.2M

2009 2020

http://www.kff.org/

http://www.modernhealthcare.com/


15

“Red Carpet Effect” Driving Enrollment in Non-Expansion States

Trend #2: Market-Based Medicaid Reform

Source: The Advisory Board Company, “Where the States Stand on Medicaid Expansion,” March 28, 2014, available at:

www.advisory.com; HHS, “Health Insurance Marketplace: Summary Enrollment Report for the Initial Annual Open Enrollment Period,”

May 1, 2014; Millman J, “These States Rejected Obamacare’s Medicaid Expansion, But Medicaid Is Expanding There Anyway,”

Washington Post, May 13, 2014, available at: www.washingtonpost.com; Health Care Advisory Board interviews and analysis.

1) Children’s Health Insurance Program.

Medicaid Expansion Finds Its Footing

Increase in Medicaid and

CHIP1 enrollment, October

2013 to March 2014

4.8M

Average decline in

projected 10-year

hospital margin in states

not expanding Medicaid

(2.4%)

State Participation in Medicaid Expansion

Participating

Will Not Participate

Undecided

March 2014

Average Medicaid

enrollment increase across

non-expansion states

2.8%

http://www.advisory.com/

http://www.washingtonpost.com/


16

Pushing Risk to Providers and Payers


Budget Pressures Creating Impetus for Reform

Provider-Led Care

Management

E.g., Oregon’s “Coordinated

Care Organizations”

Exchange-Based

Privatization

E.g., Arkansas’ “Private

Option”

Full Medicaid

Managed Care

E.g., Florida’s Statewide Medicaid

Managed Care Program

Expansion of

Traditional Medicaid

Three Non-Traditional Models of Medicaid Reform


17

Shifting Medicaid Beneficiaries to the Public Exchanges

Source: Ramsey D, “Enrollment in Arkansas Health Insurance Marketplace at 44,665,” Arkansas Times, April 22, 2014,

available at: www.arktimes.com; Jones DK and Singer PM, “Expanding Medicaid Without ‘Obamacare’,” Aljazeera

America, April 17, 2014, available at: www.america.aljazeera.com; Health Care Advisory Board interviews and analysis.

1) Federal poverty line.

Growing Interest in “Arkansas Model”

45K

150K

Non-"Private Option" "Private Option"Medicaid Expansion

Arkansas Public Exchange Enrollment

As of April 21, 2014

States Considering “Private Option”

April 2014

Medicaid expansion-

eligible individuals

(up to 138% FPL1)

Select among Silver

Qualified Health Plans

in public exchange

Enroll in private plan

with no premium

contribution

Arkansas “Private Option” Medicaid Expansion Process

http://www.arktimes.com/

http://www.america.aljazeera.com/


18

Historically Slow Growth Coming to a Close?

Trend #3: Increased Commercial Market Competition

Source: Bureau of Economic Analysis, National Income and Product Accounts Tables, April 30, 2014,

available at: www.bea.gov; Kliff S, “The $2.8 Trillion Question: Are Health Costs Growing Fast Again?”

Vox, May 2, 2014, available at: www.vox.com; Health Care Advisory Board interviews and analysis.

Seeing a Resurgence in Health Spending

0.3%

2.3% 2.3%

1.3%

3.6%

2.7%

5.6%

9.9%

2012Q2

2012Q3

2012Q4

2013Q1

2013Q2

2013Q3

2013Q4

2014Q1

Rate of Increase in Health Care

Personal Consumption Expenditures

Percent Change in Real Dollars

Fastest Growth in

Seven Years

"We're at the highest level of

growth since the slowdown

began. You have to go back

seven years to see growth

like this."

Paul Hughes-Cromwick

Senior Health Economist

Altarum Institute

http://www.bea.gov/

http://www.vox.com/


19

Cadillac Tax Forcing Pay or Play Decision

Source: Herring B and Lentz LK: “What Can We Expect from the ‘Cadillac Tax’ in 2018 and Beyond?” Inquiry, 2011,

48(4):322-37; Piotrowski J et al., “Health Policy Brief: Excise Tax on ‘Cadillac’ Plans,” Health Affairs, September 12, 2013,

available at: www.healthaffairs.org; Mandelbaum R, “Why Employers Will Stop Offering Health Insurance,” The New York

Times, March 26, 2014, available at: www.boss.blogs.nytimes.com; Health Care Advisory Board interviews and analysis.

How Long Can Employer-Sponsored Coverage Last?

Percent of Employer Plans That

Will Incur the Cadillac Tax

16%

75%

2018 2029

Reduction in average value

of private health benefits due

to the Cadillac Tax, 2029

(3.1%)

“Hands-On Management” “Hands-Off Delegation”

Convert to

Self-Funding

Hope for success in

controlling total cost growth

Drop Coverage

Trade Cadillac Tax for

employer mandate penalty

Shift to Private

Exchange

Cap growth of

employer contribution

Spectrum of Options for Controlling Health Benefits Expense

http://www.healthaffairs.org/

http://www.boss.blogs.nytimes.com/


20

Bumpy Rollout Did Not Hurt Future Projections

Path #1: Hands-Off Delegation

Source: HHS, “Health Insurance Marketplace: Summary Enrollment Report for the Initial Annual Open Enrollment Period,” May 1, 2014; Cheney K and

Haberkorn J, “Obama: 8 Million Enrolled Under ACA,” Politico, April 17, 2014, available at: www.politico.com; UnitedHealth to Expand Exchange

Presence as Profits Dip,” ModernHealthcare, April 17, 2014, available at: www.modernhealthcare.com; Cheney K and Norman B, “Insurers See

Brighter Obamacare Skies,” Politico, April 15, 2014, available at: www.politico.com; Health Care Advisory Board interviews and analysis.

1) Numbers do not add precisely due to rounding.

Public Exchange Enrollment Reaches Eight Million

2.2M

2.1M

3.8M 8.0M

October toDecember

January toFebruary

March Total

Public Exchange Enrollment in Qualified Health Plans1

2013-2014

7.0M

(Original CBO

Projection)

Renewed Interest for

2015

“We had a very modest

footprint in 2014. We do

have a bias to increase

that participation in 2015.

[…] The size of the overall

market is positive.”

Gail Boudreaux, EVP

UnitedHealth Group

States expecting to see

more insurers on their

public exchange in 2015

10+

Flawed rollout did not change CBO

enrollment projections beyond 2014

http://www.politico.com/


http://www.politico.com/


21

Source: HHS, “Health Insurance Marketplace: Summary Enrollment Report for the Initial

Annual Open Enrollment Period,” May 1, 2014; HHS, “Health Insurance Marketplace

Premiums for 2014,” September 2013; Health Care Advisory Board interviews and analysis.

Individuals Gravitating Toward Leaner Plans

20%

65%

9% 5%

2%

Bronze

Metal Tiers of Plans Chosen on Public Exchanges

October 2013 to April 2014

Silver

Gold Platinum

Catastrophic

$129 $163

$203 $240

Catastrophic Bronze Silver Gold

33%

25%

21%

10% 12%

Bronze Silver

Gold

Platinum Catastrophic

Average Monthly Premiums By Metal Tier 27-Year-Old Before Financial Assistance

Enrollees Without Premium Subsidies All Enrollees


22

Payers Responding to Anticipated Premium Sensitivity

Source: Gottleib S, “Hard Data On Trouble You’ll Have Finding Doctors in Obamacare,” Forbes, March 8, 2014,

available at: www.forbes.com; McKinsey & Company, “Hospital Networks: Configurations on the Exchange and

Their Impact on Premiums,” December 2013; Health Care Advisory Board interviews and analysis.

1) “Pathway X” bronze plans compared to leading PPO plan

offering across nine states.

2) Comparing products by the same carrier of the same tier,

across 7 carriers.

Networks Narrowing on the Public Exchanges

Median premium reduction directly

attributable to network narrowing2

26%

Degree of Hospital Exclusion Across

Public Exchange Plans

20 Urban Markets, December 2013

Excludes 30% of

20 largest hospitals

Average Percent of PPO Network Specialists

Included in Exchange Plan Networks1

Anthem BlueCross BlueShield, 2014

62% 59% 59% 48%

OB/GYNs Orthopedists Oncologists Cardiologists

38%

32%

30%

“Ultra-Narrow”

“Narrow”

Broad

Excludes 70% of

20 largest hospitals

100% PPO Network Breadth

http://www.forbes.com/


23

Each Looking for Best Set of Network Offerings

Source: Xerox, “Buck Consultants’ Private Health Insurance Exchange Serves 400,000 Participants for 2014 Health Care Enrollment,” November 20, 2013;

Mercer, “Mercer Signs Up 52 Employers For Its Private Exchange Platforms, Including Petco and Kinder Morgan,” October 15, 2013; Aon Hewitt, “Year-

Two Enrollment Results Show Private Health Exchanges Can Mitigate Costs and Create Greater Individual Accountability,” March 6, 2014; Accenture, “Are

You Ready? Health Insurance Exchanges Are Looming, “ 2013, available at: www.accenture.com; Health Care Advisory Board interviews and analysis.

1) Includes 500K enrolled in Towers Watson’s

Retiree Exchange.

Growing List of Private Exchange Operators

400K

1.8M

600K

200K

640K

BuckConsultants

Aon Hewitt Mercer TowersWatson

ConfirmedPrivate

ExchangeEnrollment

February 2014

BSwift Inc.

February 2014

United Benefit

Advisors

September 2013

National Financial

Advisors

April 2014

First Niagara

Benefits Consulting

December 2013

AIA Benefits

Resource Group

October 2013

The Partners Group

Projected private exchange

enrollment, 2018

40M

Confirmed Private Exchange Enrollment

Number of Lives, 2014

Newest Benefit Consultants to

Launch Private Exchanges

1

Private exchange operators,

May 2014

140+

http://www.accenture.com/


24

Ensuring Defined Contribution From Employment to Retirement


1) Acquired by Towers Watson in 2012.

2) Acquired by Mercer in 2014.

Spectrum of Private Exchange Services

Active Employee

Exchanges

Early Retiree

Exchanges Medicare Exchanges

Description

Allows Medicare-eligible

retirees to compare Medicare

Advantage, Medigap, and

Part D plans

Allows pre-65 retirees to

compare group coverage

options or on- and off-

exchange individual plans

Allows active employees to

compare vendor and

employer-selected network

options

Sample

Platforms

• Extend Health1

• Aon Hewitt Navigators

• Retiree Health Access

Exchange

• Transition Assist2

• Towers Watson Retiree

Medical Exit Solution

• Aon Active Health

Exchange

• Mercer Marketplace Active

Exchange

Employer

Adopters

• IBM

• Dupont

• Caterpillar

• AT&T

• Time Warner

• UPS

(none publicly named) • Sears Holdings

• Darden Restaurants

• Walgreens

• Petco

• Kinder Morgan


25

Long-Term Savings Must Rely on Network Management

Source: Mathews AW, “To Save, Workers Take On Health-Cost Risk,” Wall Street Journal, March 17th, 2013, available at:

www.wsj.com; Aon Hewitt, “Year-Two Enrollment Results Show Private Health Exchanges Can Mitigate Costs and Create

Greater Individual Accountability,” March 6, 2014; Buttorff C, Tunis SR, and Weiner JP, “Encouraging Value-Based Insurance

Designs in State Health Insurance Exchanges,” AJMC, July 22, 2013; Health Care Advisory Board interviews and analysis.

Short-Term Savings from Participant Buy-Down

Change in Actuarial Value Of Selected Plan

From Previous Year

Aon Active Health Exchange, 2013-2014

Sample Active Purchaser Exchange

Carrier Requirements

Generic utilization

programs

Value-based

benefit design

Centers of

excellence steerage

Clinical and care

management

programs

42%

12%

32% 81%

26%

7%

2013 (Year 1) 2014 (Year 2)

"Bought Down"

Same Value

"Bought Up"

http://www.wsj.com/


26

Disrupting Traditional Channels of Coverage

Source: Congressional Budget Office, “May 2013 Estimate of the Effects of the Affordable Care Act on Health Insurance

Coverage,” available at: www.cbo.gov; Accenture, “Are You Ready? Health Insurance Exchanges Are Looming, “ 2013,

available at: www.accenture.com; Kaiser Family Foundation, “The Coverage Gap: Uninsured Poor Adults in States that

Do Not Expand Medicaid,” April 2, 2014, available at: www.kff.org; Health Care Advisory Board interviews and analysis.

1) Based on number of lives falling into the “Medicaid expansion

gap” in non-expansion states.

2) Based on the number of Medicare Advantage enrollees.

A Burgeoning Retail Market

25M

87M

5M

40M

17M

PublicExchange

"Private Option"Medicaid

Expansion

PrivateExchange

MedicareExchange

Total RetailMarket

Projected Size of the Potential Retail Market

2018

1

2

http://www.cbo.gov/

http://www.accenture.com/

http://www.kff.org/


27

Individuals Selecting “Ultra”-High Deductible Plans

Source: Breakaway Policy Strategies, “Eight Million and Counting: A Deeper Look at Premiums, Cost Sharing and

Benefit Design in the New Health Insurance Marketplaces,” May 2014; eHealth, “Health Insurance Price Index

Report for Open Enrollment and Q1 2014,” May 2014; Health Care Advisory Board interviews and analysis.

1) Employer-Sponsored Insurance.

2) Silver plans, medical deductible only.

Facing an Ultra-High Deductible Consumer

Annual Deductibles of Individual Plans

Selected on eHealth

13%

3%

11%

5%

30%

39% $6,000+

$3,000-$5,999

$2,000-$2,999

$1,000-$1,999

$500-$999 < $500

October 2013 – March 2014

$1,135

$2,500

$6,250

ESI Public Exchanges

Annual Deductibles of Individual Plans

Offered For ESI1 and Public Exchanges

2014

Mean Median

Max

2


28

HDHP1 Enrollees Have Greater Motivation to Price Shop

Source: KFF, “2012 Employer Health Benefits Survey,” available at: www.kff.org; New Choice Health, “New Choice Health

Medical Cost Comparison,” available at: www.newchoicehealth.com; Healthcare Blue Book, “Healthcare Pricing,” available at:

www.healthcarebluebook.com; Kliff S, “How much does an MRI cost? In D.C., anywhere from $400 to $1,861,” Washington

Post, March 13, 2013, available at: www.washingtonpost.com; Health Care Advisory Board interviews and analysis.

1) High-deductible health plan.

2) $2,086; based on KFF report of average HDHP

deductible.

3) $733; based on KFF report of average PPO deductible.

Substantial Potential for Price Shopping

Consumers Paying More Out-of-Pocket

Fall within HDHP deductible2

$150 $275 $400 $900 $1K

$2K

$6K

$9K

$18K $730

$900

$1,269

$2,183

$411

• Price-sensitive shoppers

will be acutely aware

of price variation

• MRI prices range from

$400 to $2,183

MRI Price Variation Across

Washington, DC

Fall within PPO

deductible3

http://www.kff.org/

http://www.newchoicehealth.com/

http://www.healthcarebluebook.com/

http://www.washingtonpost.com/


29

Spurred By Upcoming Regulatory Changes

Path #2: Hands-On Management

Source: Gabel JR et al., “Small Employer Perspectives On The Affordable

Care Act’s Premiums, SHOP Exchanges, And Self-Insurance,” Health Affairs,

32(11): 2032-39; Health Care Advisory Board interviews and analysis.

1) 3 to 50 FTEs.

Self-Funding Spreading to Smaller Employers

26% 74%

Percent of Firms Whose Brokers Had

Discussed the Possibility of Self-Insurance

No Yes

n = 604 Small Firms1

Definition of “Small Firm” Under the

Affordable Care Act Expands in 2016

28%

36%

Percent of Private Sector Employees

Pre-2016 Definition

(Up to 50 Employees)

Post-2016 Definition

(Up to 100 Employees)

ACA Requirements Avoided By Self-Funding

Modified

Community Rating

Essential Health

Benefits

Guaranteed Issue

and Renewability

Medical Loss Ratio

Requirements


30

Custom Network Builders Offering Local Solutions

Source: Innovative Healthware Services, Inc., Arnold, MD; Health Care

Advisory Board interviews and analysis.

1) Innovative Healthware Services.

Leading to Hands-On Network Management

Case in Brief: Innovative Healthware Services

• Private company based in Arnold, Maryland that

markets software solutions for PPOs, TPAs, providers,

and payers

• Provides “Custom Provider Network” solution for

self-funded employers to limit the network to selected

list of hospitals, physicians, and ancillary care

“Working with the TPA and

employer, we replace the ‘one

size fits all’ network with a

cost-effective customized

network created around the

needs of your business and

your employees.”

Innovative Healthware Services

Self-funded employer

submits list of physicians,

hospitals, and ancillary care

IHS negotiates cost-effective

provider agreements using

Medicare-based pricing

IHS continually evaluates

network providers to “ensure

competitive price contracts”

IHS1 “Custom Provider Network” Solution


31

Exporting Walmart’s Centers of Excellence Program

Source: Walmart, “Walmart, Lowe’s And Pacific Business Group On Health Announce A First Of Its Kind National

Employers Centers Of Excellence Network,” October 8, 2013; Health Design Plus, “Health Design Plus & Employers Health

Announce National Centers of Excellence Initiative,” June 11, 2013; Chen C, “Providers Using Bundled Payments, Quality

to Entice Employers,” Health Data Management, March 11, 2014,; Health Care Advisory Board interviews and analysis.

Custom Networks Becoming Widely Available

Case in Brief: Health Design Plus

• Third-party administrator based in

Hudson, Ohio that creates Centers of

Excellence (COE) programs for self-

funded employers

• In 2013, partnered with Employers Health

Coalition in Ohio and Pacific Business

Group on Health to make COE program

available to employer members

Two New Employer Coalition Partnerships

Forged in 2013

Pacific Business Group on Health

(San Francisco, California)

• 60 large employer members with

employees in all 50 states

• 10M covered lives

Employers Health Coalition

(Canton, Ohio)

• 300+ employer members with

employees in all 50 states

• 3M covered lives

“It would be prohibitive for a small

employer, with only one or two employees

needing surgery a year. When you spread

the administrative costs over a number of

employers, it becomes more attractive.”

Bruce Sherman

Medical Director, Employers Health Coalition


32

Source: Intel Corporation, “Employer-Led Innovation for Healthcare Delivery and Payment Reform: Intel Corporation

and Presbyterian Healthcare Services,” Santa Clara, California; Evans M, “Slimming Options,” Modern Healthcare,

July 13, 2013, available at: www.modernhealthcare.com; Health Care Advisory Board interviews and analysis.

1) Presbyterian Healthcare Services.

Entering Into Direct Provider Contracts

Case in Brief: Intel Corporation

• Large, multinational employer

headquartered in Santa Clara,

California

• Entered into narrow-network

contract with Presbyterian

Healthcare Services, an 8-hospital

system in New Mexico, for

employees at Rio Rancho plant

5,400 Covered lives in

contract

$8-10M Projected savings

through contract,

2013-2017

Key Components of Partnership

Customized Care Offerings

Addition of depression screening into

customary provider workflow

Infrastructure for Care Management

Conversion of Intel’s on-site clinic into full

service patient-centered medical home

Narrowing of Health Plan Options

Intel reducing number of health plan

options from 8 to 4; two remaining plans

are narrow networks of PHS1 providers

Shared Accountability

Upside and downside risk for health care

spending compared to projected target

http://www.intel.com/content/dam/www/public/us/en/documents/white-papers/healthcare-presbyterian-healthcare-services-whitepaper.pdf






33

Saving Money—For Its Associates and Customers

Source: Canales MW, “Wal-Mart Opening Clinic in Cove,” Killeen

Daily Herald, April 18, 2014, available at: www.kdhnews.com; Health

Care Advisory Board interviews and analyais.

Walmart Quietly Enters Full Primary Care

The Largest “Activated Employer” Yet

“As the largest private employer in the U.S., we are

committed to finding ways to drive down health care

costs for our 1.3 million U.S. associates and the 140

million customers who shop our stores each week.”

Labeed Diab

President of Health and Wellness, Wal-Mart

Visit fee for

Walmart

associates $4

Visit fee for

Walmart

customers $40

Walmart Care Clinic Model

Walmart associate or

customer visits Care Clinic

Care Clinic staffed by two NPs

from QuadMed, an employer

onsite clinic provider

NP provides primary care

services, refers to external

specialists and hospitals

http://www.kdhnews.com/


34

Driven By Unsustainable Spending Growth


Seeing Shifts in Two Major Markets

Traditional

Public Payers

Traditional

Commercial Insurance

Activated

Group Market

Risk-Based Payment

Programs

Private Individual

Market

“Retail Private Market” “Forced Public-Payer Risk”

Shifts in Public, Commercial Insurance Markets

• Price cuts

• Risk shifting

• Narrower networks


35

Multiple Opportunities To Appeal to Decision-Makers


Winning Share at Two Points of Sale

Network Selection Care Decision Network Assembly

Decision Processes Involved in Provider Choice

Being chosen by payers, employers,

exchange operators, custom network

builders, and accountable physician

entities to be offered as a network option

Being chosen by

patients at the

point of care

Being chosen by

individuals during

enrollment

Secure Enrolled Lives Win Share of Volumes

1 2


36


Capturing New Channels of Growth

Established

Provider

Care Delivery

Network

Relationship-Based

Referring Physician

Cost-Conscious

Referring Physician

Price-Sensitive

Consumer

Entrenched

Payer

Vulnerable

Payer

Activated

Employer

Exchange

Operator

Custom Network

Builder

Secure Enrolled Lives Win Share of Volumes

Traditional

Growth

Channels

New

Growth

Channels

Key Decision-Makers in Traditional and New Growth Channels

Individual

Insurance Shopper

Accountable

Physician Entity


37

Catalyzing a Shift in Network Demands


No Longer Insulated From Market Forces

Traditional Market Retail Market

Growing number of buyers

1

Proliferation of product options

2

Increased transparency

3

Reduced switching costs

4

Greater consumer cost exposure

5

Passive employer,

price-insulated employee

Activist employer,

price-sensitive individual

Broad, open networks Narrow, custom networks

No platform for apples-to-

apples plan comparison

Clear plan comparison

on exchange platforms

Disruptive for employers

to change benefit options

Easy for individuals to

switch plans annually

Constant employee

premium contribution,

low deductibles

Variable individual

premium contribution,

high deductibles

Characteristics of a Traditional vs. Retail Market


38

Delivering Desirable Network Attributes at Low Cost


Redefining “Value” in Health Care

Four Imperatives for Health Systems

Low Unit Price

Radically restructure

to accept low

unit prices

Total Cost Control

Develop population

health model to control

cost trend

Geographic Reach

and Clinical Scope

Meet minimum network

adequacy demands

Clinical and Service

Quality

Differentiate to

consumers, network

assemblers

Low Cost Desirable Network Attributes


39


Meeting Cost Demands of a Retail Market

Degree of Cost Control

Two Provider Strategies to Win on Cost

Price Cut Trend Control

Provider

Strategy

• Improve internal efficiency • Reduce excess utilization

• Refer care to higher-performing

specialists

• Implement care management

Market

Reward

• Inclusion in network

• Share of volumes from

price-sensitive patients

• Inclusion in network

• Referral preference from payers,

accountable physicians

• Share of lives during network selection

Care Delivery Network


40


Network Scope and Reach Critical Levers

Individual Insurance

Shoppers

Employers

Payers

Private Exchange

Operators

Custom Network

Builders

Provider Strategy:

1.Ensure sufficient reach and density of physicians and access points

2.Cover all needed specialty services

3.Make compelling argument for guaranteeing access

Provider Strategies for Three Constituencies Considering Reach and Scope

Consistent Strategy Across All Three Groups


41

Network Assemblers Beginning to Take Note


Clinical and Service Quality at Two Levels

Network Assemblers Individuals

Facility-level clinical

process, outcome

measures

Actual ease of

access, care

experience

Network-level

quality, access,

service ratings

Network Selection Care Decision

Quality Demands of Network Assemblers and Individuals

Individual remembers care

experience during re-enrollment

Network assembler adjusts strategy

to respond to market demands


42


Preparing for the Coming Retail Marketplace

Clinical and

Service Quality

• Evidence-based processes

• Strong clinical outcomes

• High member satisfaction

• On-demand access

• Online services

Cost

• Low unit price

• Utilization management

• Effective trend control

Geographic Reach

and Clinical Scope

• Broad geographic footprint

• Density of access points

• Full spectrum of clinical

services

Three Core Attributes to Become the Network of Choice


43

Arena of Competition Expanding Beyond Care Decision


Winning Market Share in a Retail World

Network Assembly Network Selection Care Decision

All providers included in nearly all

networks; only compete on price

negotiations

Employees have little choice of

networks

Most decisions made by

referring physician

• Low total per-member cost

• Promise of total cost savings

• Low premium

• Low employee contribution

• Low out-of-pocket

cost

• Broad geographic footprint

• Comprehensive clinical scope

• Inclusion of preferred

physicians

• Proximity to access

points

• High clinical process, outcomes

performance

• Adherence to evidence-based care

• On-demand access options

• Centralized navigation services

• Prompt appointment times

• Extended hours

• High population health

quality ratings

• High member satisfaction

ratings

• Positive brand association

• On-demand access options

• Great care experience

• On-demand access

options

• Prompt appointment

times

• Extended hours

Cost

Reach and

Scope

Clinical and

Service

Quality

Network Assemblers Individual Consumer

Reta

il M

ark

et

Traditional Market

Th

resh

old

Fa

cto

rs

Diffe

ren

tiatin

g

Fa

cto

rs

Expanding Arena of Competition

eab.com

Higher Education Market Update

©2014 The Advisory Board Company • eab.com 2

Looking Like the Hospital Industry Circa 1992

Costs Rising Quickly with Relatively Little to Show for It

Starting with Industry Fundamentals

1,120%

601%

385%

280%

244%

1975 1980 1985 1990 1995 2000 2005 2010

College Tuition & Fees

Medical Care

Shelter

Consumer Price Index

Food

College Costs Rising Faster Than Health Care

Increase in College Tuition and Fees (1975-2010)

55.5% 57.4% 57.2%

41.9% 42.3% 43.4%

0%

50%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Private Public

Five-Year Graduation Rates Largely Unchanged



Why Focus on Efficiency and Cost When You Can Raise Price

Colleges and Universities Growing Administrator Ranks at Fast Pace

Number of FTE Faculty and

Instructional Staff per FTE Professional

2.5 2.6 2.5

3.3 3.4

2.7

1.8 2.0 1.9

2.5 2.5

2.2

PrivateBachelor's

PrivateMaster's

PrivateResearch

PublicBachelor's

PublicMaster's

PublicResearch

2000 2012

Most Growth in

Student Services

However, the report also shows that the majority of salary expense

growth is tied to Student Services, not Institutional Support.

“Wage and salary expenditures for student services have grown faster

than other spending categories.”

Delta Cost Project

February 2014 Issue Brief

60%

25%

Position ControlExists

Position ControlEffective

Universities with Position Control Process

n=107



Largely Fixed Costs with Significant Excess Capacity


Most Costs are in Faculty and Largely Fixed

Total Academic Department Costs and Type (in Millions)

37.5 40.4

64.2

7.7 8.3

9.1

15.3 13.7

22.8

5.1 7.2

9.5

Regional PublicSoutheast

Regional PublicMidwest

Large Public Midwest

Tenure Track Salary Non-Instruction Salary Costs

Adjunct Salary Direct Non-Salary Expenditures

Surprisingly Large Number of Empty Seats

A: All Texas Public

Universities

B: All Virginia Public

Universities

C: All UK Universities

D: Northwestern

University

E: Stanford University

33%

36%

22% 23%

19%

A B C D E

Classroom Hours / Week

60%

61%

49%

32%

48%

A B C D E

% of Seats Filled / Class

Room Utilization Seat Utilization

Largely

Fixed

Largely

Variable



Federal Government Staying on the Sidelines

Little Likelihood Washington Flexes Its Purchasing Power in Near Future

Federal Government Accounts for

44% of Higher Education Revenues

Little Likelihood It Will Wield It

Net Tuition Calculator

$200

$95

$84

$42

$22

$9

Federal Government

+44%

Consumer

State

Other

(Fundraising)

Local

Corporations

Loans

Pell Grants

Research

Total Revenue: $452 Billion

Financial Aid Shopping Sheet

National College Scorecard

Incentives for Improved Outcomes

(“Race to the Top” for Colleges)

Tying Federal Aid to Outcomes

or Tuition Price

Accreditation Reforms


Public 58%

Private (Non-Profit) 30%

For-Profit 12%

$55B


Disproportionately Public and Increasingly Un(der)funded

State-Run Colleges Predominate but are Receiving Less State Support over Time

Public Colleges Are 57% of the Market

Total Revenue: $451 Billion

$259B

Tuition as Percentage of Educational Revenues

for Public Universities

State Funding Lags Behind Enrollment Growth

Distribution of Higher Education Revenue by Segment

26.1%

29.3%

35.5%

47.0%

20%

30%

40%

50%

1987 1992 1997 2002 2007 2012

$137B

Economic recessions have accelerated the “privatization” of public

education, with states making deep cuts in funding and public

colleges responding with steep increases in tuition price


What’s Driving Change?

States Starting to Pay for Better Outcomes

Tying Public University Funding to Student Graduation Success

P4P Funding Spreading Across Nation

Before 2010:

Pennsylvania

Indiana

Tennessee

Ohio

After 2010:

24 states (and counting)

have now approved or are

currently planning new

funding models

Still Relatively Few Dollars at Risk

-3.8%

-2.9% -2.9% -2.8%

-1.7% -1.1%

0.1%

4.1%

8.4%

Me

mph

is

UT

Ma

rtin

Mid

dle

Ten

n. S

tate

Te

nn

essee

Tech

Te

nn

essee

Sta

te

UT

Ch

atta

noo

ga

Ea

ste

rn T

en

n.S

tate

UT

Kn

oxville

Au

stin

Pe

ay

Tennessee State Outcomes Funding Changes

Between 2011 and 2014

Rising Tide Not Lifting All Boats

Six schools together received less than

1% of the recent $14.6M increase in

overall Tennessee state funding


Customers Starting to Question the Value of a Degree

Early Evidence That Students are “True Drivers” on Price

Betting on Market-Driven Reform

Starting to Vote with Their Feet

76%

57%

Are Graduates Getting Their Money’s Worth

Students admitted

to first-choice

institution

Students enrolled in

first-choice

institution

62%

Of students who did not

enroll at their first-choice

cited cost as primary factor

Admissions and Enrollment Responses, Higher Education

Research Institute at UCLA’s Freshman Survey

n = 165,743 Poor Job Prospects

44% Underemployment rate

for recent college

graduates

Skeptical Employers

11% Employers who strongly

agree that graduates

possess skills

businesses need

Low Public Confidence

32% Americans who say

that college is worth

the investment


50%

55%

60%

65%

70%

75%

80%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1996 2006 2016 2026

Co

lle

ge

Pa

rtic

ipa

tio

n R

ate

(%

)

Hig

h S

ch

oo

l G

rad

ua

tes

(T

ho

us

an

ds

)

Participation Graduates

What Will Really Pressure Future Price and Value

U.S. Undergraduate Enrollment Growth Projected to Flatten in Next Decade

High School Graduate Numbers Flattening Undergraduate Enrollment Growth Will

Decline in Next Decade Number of High School Graduates and College

Participation Rate, Fall 1996 to Fall 2027

2.8%

1.2%

1996 to 2010 2011-12 to 2021-22(projected)

Actual and Projected Average Annual Growth in

Undergraduate Enrollment, Fall 1996 to Fall 2021


Rise of Low Cost Alternatives to Brick and Mortar

Online Education Threatens Traditional Ground-Based Economics

1.6

3.2

5.6

7.1

9.6%

18.2%

27.3%

33.5%

2002 2004 2006 2008 2010 2012

Students Taking at Least One

Online Course (Millions)

New Competitors Enter the Ring Students Have Real Alternatives

“In fifteen years from now half of US

universities may be in bankruptcy.”

Clayton Christensen

Harvard Business School

Share of Students Taking at

Least One Online Course


Revenue CAGR:

1.5-2.0%

The Problem for Higher Education Moving Forward

Increasing Conversation around the Sustainability of the University Business Model

Source: Inside Higher Ed, Survey of of College and University Business Officers, http://www.insidehighered.com/news/survey/cfo-

survey-reveals-doubts-about-financial-sustainability; Wall Street Journal, “Public University Costs Soar”, 3/16/2013; Education

Advisory Board interviews and analysis. Education Advisory Board analysis 1) Projected growth in costs and revenue accounts for inflation

Of business officers

disagreed with the

statement:

I am confident that my

institution’s business

model will be sustainable

over 10 years.

83% of non-elite private

college CBOs, and 74%

of non-flagship public

universities peers, had no

confidence in the

sustainability of their

business model over the

next 10 years.

59%

2000 2003 2006 2007 2009 2012 2013 2015 2018

Revenues

Salary

Freeze

Layoffs

Hiring

Freeze

Furloughs

Costs

Great Recession

Cost CAGR:

4.5%

http://www.insidehighered.com/news/survey/cfo-survey-reveals-doubts-about-financial-sustainability














Maybe We Can Grow Our Way Out of This?

16%

27%

19%

Bachelor's Master's Doctorate

All Postsecondary Institutions

Projected Growth by Award Level, 2011-2021

Master’s as Share of Total Degree Completions, 2011

Upskilling the Professional Workforce The Degree Completion Opportunity

U.S. Population by Education Level

Master’s

720 K

28%

Bachelor’s

1.7M

66%

Doctoral

160K

6%

87.4M

34.2M

19.7M

40.6M

22.8M

High School orLess

Some College,No Degree

Associate'sDegree

Bachelor'sDegree

Graduate Degree

54 million adults

have some college

or an associate’s 50%

Say they want to go

back to school –

only 3% do so


Bending the Cost Curve Has Been Difficult

Universities Saving Relatively Little and Avoiding Largest Cost Buckets

Planned Savings from Recent High Profile Engagements

Typical Savings: 2-3%

$97.5M $66.2M $82.5M

$3.5B

~$2.5B

~$3.5B

Projected Savings Operating Budget

CBOs Stating Budget Cuts Impaired Effectiveness

of Service Delivery at their Institutions

45.2%

25.1%

11.2%

BusinessServices

Student Services AcademicPrograms


Professors Really Do Run Higher Education

Academic Decisions Drive Vast Majority of Revenues, as Well as Most Costs

Academic Units Generate

Nearly All University Revenue…

Tuition

Tech

Transfer Corporate

Funding

Public

Service

Federal

Grants

Econ

Development

State

Funding

Fundraising

… And Their Decisions

Drive Most Costs

Procurement

IT

Facilities

Staffing

Workload

Centers &

Institutes

Energy

Curriculum

How can we help faculty understand the cost

and revenue implications of their decisions?

!

The Fundamental Challenge


Findings From Our Work with The Gates Foundation

Faculty Add Courses, Never Subtract

Course and Major Proliferation Reducing Class Size

1,500

2,000

2,500

3,000

3,500

Year 1 Year 2 Year 3

To

tal D

isti

nc

t C

ou

rse

s

Growth in Number of Distinct Course

Offerings at Six Universities

3% Annual increase in the number of hours of

faculty instructional time spent on small

courses (2-10 students)

Annual increase in faculty time spent on

large courses (11+ students) 1%

Mid-size Regional Public University

Distribution of Courses by Class Size

44%

≤10 Students

56%

11+ Students

1

2-5

6-10

11-30

30+



Diseconomies of Scale

Larger Departments Are Not Always More Efficient

Number of Distinct Lower and Upper Division Courses by Undergraduate Department Size

n = 7 Public Universities

Agriculture Anthopology

Engineering

Art

Biology

Communication

English Geography

History

Mathematics

Marketing Music

Nursing

Psychology

Technology

0

50

100

150

200

250

300

350

0 500 1000 1500 2000 2500 3000 3500 4000 4500

Dis

tin

ct

Co

urs

es

Department Size (Total Faculty Credit Hours)

Distinct Lower Division Distinct Total Courses

Larger departments offer more courses,

particularly in the upper division, than

their smaller counterparts



The Myth of the Lazy Professor

Faculty Teaching Less, Working More

Faculty Work Hours Comparable to

Higher-Pay Professions

Significant Release Time

Devoted to Administrative

Functions, Non-tenure Staff

~3K Total semester hours

released per year

~3/4 Share of releases awarded

for administration

Share of releases awarded

to non-tenured faculty4 ~1/3

500 Course equivalent of tenured

release time for administration

(15% of capacity)

Total theoretical spending

on faculty release time ~$10M

Yet Majority of Faculty Don’t Teach

Standard Load

Share of Faculty by Load Across Select

Departments3

62%

16% 23%

Underload Standard Load Overload

55.5 60 59.5

Associate,

Corporate Law Firm2 Cardiologist Full-Time Faculty1


67%

48% 45%

38%

30%

20%

11% 7%

4% -2% -7% -10% -24%

-47%

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Starting to Ask Faculty to Reform

University Beginning to Look at Academic Cost and Efficiency

* Regional public university participating in Gates Foundation project

Which Departments Make and Lose Money?

Contribution Margins for Select Academic Departments* Key Findings from Gates Research

Proliferation of courses

and majors

Decreasing class size

Increases in faculty

release time

High level of unfunded

research

Death by a thousand

committees

Large Opportunities for Improvement


Is this the record industry circa 1988?

Faculty and Classrooms -- How Quaint

Digital Technology (Beginning) to Transform Where, What, and How Students Learn

It’s online… …it’s about competencies

and skills… …it’s personalized

to the student

MOOCs and Online

Learning

Competency-Based

Education

Adaptive Learning

Platforms

• Convenient access and

lower cost

• Lower university revenues

• Standardizes learning

(ICD-10 for higher ed)


• Decreased importance of

brands and degrees

• Integration of education with

employment

• Improved outcomes and

lower costs

• Improved student completion


Key

Players

Why

Disruptive?

Implications for

Sector


Where is the industry five years out?

A Remarkably Resilient Business Model

Remain chronically underfunded,

dependent on state support

Consolidation right answer but

politically difficult

Remain primary providers of

postsecondary education in their

states

Continue to serve (and struggle

to graduate) less well prepared

students

Best brands, will attract best

(richest) students

Diversified revenue base—

education, research, philanthropy

Increasingly global student bodies

and ambitions

Flagship publics going private

(UVA, Michigan)

Tuition-Dependent Privates

Regional Publics and Two Years

Bleakest outlook—high prices

not supported by the brands

Lack large endowments or

state safety net

Future of price discounting,

declining enrollment, closures

$53 Billion

At Risk

$118 Billion

Muddling Through Brighter Future

Public & Private Research

$225 Billion

Majority of EAB CV and Market Focus

Analyst and Investor Day September 11, 2014

Documents

Analyst and Investor Day€¦ · 1) Adjusted EBITDA excludes share-based compensation expense, equity method investment loss, earn-out and warrant fair value adjustments, transaction